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Pivot Points have been around forever in trading but as with so many trading tools, lots of misinformation has been spread as well. In this article, we will introduce the most important concepts that will allow you to use Pivot Points more effectively in your trading.
What are Pivot Points?
Pivot Points are price levels that are calculated based on previous price action. The calculation of the main Pivot Point is very straight forward and simple:
(High of previous day/week + Low of previous day/week + Close of previous day/week) / 3 = Central Pivot Point
So you can see, the central Pivot Point is just the average of last week’s price action more or less.
In the screenshot below, I marked the High, the Low and the Close of the previous week’s price action. The resulting Pivot Point (red line) is the average of those 3 price levels.
Above and below the central Pivot Point, further Pivot levels can be found. They are named R1 – R4 for the resistance Pivot ...
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